Vale (NYSE:VALE) announced that it has sold 26.5% stake in its logistics unit VLI to Brookfield Asset Management for $2 billion. The sale agreement is subject to approval from relevant authorities. 
Earlier in September this year, it had sold 20% of its stake in VLI to Mitsui for $667 million and an additional 15.9% to FGTS for $573 million. Considering this, Vale seems to have got itself a great deal in the additional stake sale. The latest stake sale has brought down Vale’s stake in VLI to 37.6%, but it will retain management control. 
VLI has significant concessions for operating railroads, and also owns port infrastructure and warehouses. Its integrated logistics system enables it to transport cargo for more than 100 clients across the length and breadth of the country. Vale’s decision to reduce its stake in VLI is part of its strategy to get rid of non-core assets in order to reduce future capital expenditure on them, and instead concentrate on its core operations. Weak iron prices have dented the company’s results in the last few quarters.
VLI provides integrated logistics solutions to clients through 10,540 kilometers of railroads, four inland terminals with a total storage capacity of 220,000 tonnes, and three maritime terminals and ports operations. While VLI itself owns the concessions and sub-concessions for railroads, it also has access to Vale’s rail concessions. It also has a rolling stock of 13,000 rail cars and 600 locomotives. The cargo carried generally includes grains, fertilizers and steel materials and products. Vale’s own output of iron ore and other minerals is not handled by VLI. 
The Opportunity For VLI
It is expected that cargo volume for grains, fertilizers and steel products will increase in Brazil going forward. The country has a lot of land, and can easily meet the growth in global demand for food as world population increases and countries with a paucity of arable land are forced to import. In addition, a number of infrastructure investment projects are being carried out by the Brazilian government which require huge quantities of steel. The country’s transport infrastructure is creaking and will require the development of new railroads to ease pressure on the road network.
VLI plans to double its cargo handling capacity by investing approximately $3.8 billion over the next 5 years in locomotives, wagons, rail network and port terminal capacity. While part of the capital expense is to be met by using operating cash flow and debt, about $820 million will be financed by capital increase. Thus, while there is immense future opportunity in cargo transportation, it will also require further capital investment to develop the capacity to handle more cargo. 
Why Vale Is Selling Stake
Vale is looking to cut down on capital expenditure on non-core businesses in the face of challenging market conditions for iron ore. Hence, selling a stake in VLI is a prudent move by the company to bring in equity partners to share its burden. In its 2012 annual report, Vale had expressed its desire to bring in equity partners in VLI to fund its capital requirements. Therefore, the deals aren’t surprising for the market. 
The company plans to focus on its core business of iron ore, nickel, copper, coal and fertilizers going ahead. It is looking to raise cash for major investments in these areas in the coming years. It sold its residual stake in Norsk Hydro last month and is planning to sell partial stakes in its coal, fertilizer and steel businesses to reduce its own costs and decrease capital spending in the years ahead. ((Brazil’s Vale Considers Selling Stakes in Coal, Fertilizer Businesses, Steel Plant, WSJ))
The Future Course
Vale will retain management control of VLI even though its stake is now less than 40%. In recent years, the Brazilian government has pushed Vale to set up and maintain freight operations, even as its own efforts in the area have faltered due to high costs, bureaucratic obstacles and political conditions. Therefore, the stake sale in VLI will reduce Vale’s burden to some extent. Vale is even considering a public listing for VLI going forward, which will help it raise more money and reduce its own commitment. We think it would allow Vale to better compete with global mining rivals like Rio Tinto and BHP Billiton, which are also reducing non-core assets to focus on their bread-and-butter iron ore business.
We have a Trefis price estimate for Vale of $15, which is in line with the current market price.Notes:
- Vale signs agreement to sell additional stake in VLI, Vale News Release [↩]
- Vale reaches agreement to sell stakes in VLI and negotiates sale of an additional stake, Vale News Release [↩]
- Vale To Sell Stakes In VLI Logistics Unit For $1.24 Billion, RTT News [↩]
- Vale Sale of $1.5 Billion Cargo Unit to Help Shares, Itau Says, Bloomberg [↩]
- Vale 2012 20-F, SEC [↩]